Double Taxation Conventions and Beneficial Ownership Clauses

1. Double Taxation Conventions andBeneficial Ownership Clauses Congresso Internacional de Direito Tributario � Rio de Janeiro Philip Baker QC Grays Inn Tax Chambers

3. 1) Background E.g. Article 10 (2) �� such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: �.�

4. 1) Background Found in the Dividends, Interest, [Royalties] and �Other Income� Articles Very important for reduced withholding tax claims Originated in 1977 OECD Model Used previously in e.g. US and UK DTCs

5. 1) Background Note: has a technical meaning in common law systems � �beneficial ownership� contrasted with �legal ownership� The need for an �international fiscal meaning� French: �b�n�ficiaire effectif�

6. 1) Background What is the meaning of �beneficial ownership� The original OECD Commentary: mere nominees or agents The Conduit Companies Report (1986): mere fiduciary or administrator Commentary amended 1995 and 2002 A limited anti-shopping provision

7. 2) The Indofood case English High Court � 7th October 2005 English Court of Appeal � 2nd March 2006 Why was the case brought in the English courts?

8. The Indofood case

9. The Indofood case

10. The Indofood case Background: termination of the Indonesia-Mauritius DTC Proposal to insert a Dutch SPV Was this a �reasonable measure� The knock-out blows: A) the Dutch SPV would not be the �beneficial owner� of the interest B) The Dutch SPV would not be a resident of the Netherlands

11. The Indofood case The meaning of �beneficial ownership� CA: An �international fiscal meaning� Beneficial ownership meant: �the full privilege to directly benefit from the income� � taken from the Indonesian Dir-Gen of Income Tax

12. The Indofood case The Dutch SPV would not be the beneficial owner as: A) It was obliged to pay on the interest in 1 day B) Precluded (by the note conditions) from finding the money from any other source Regard is to be had to the �substance of the matter�

13. The Indofood case Conclusion: The Dutch SPV would not be the beneficial owner The interposition was not a reasonable measure

14. What Indofood decided UK law or Indonesian law? �International fiscal meaning� vs. Art. 3(2) OECD Commentary

15. What Indofood decided Is the decision really that surprising? The egregious facts: Same loan in and out Same interest in and out Fixed timetable Issuer was omitted from cash flows The Note Conditions precluded funds from any other source

16. Implications of the case Limited confirmation of meaning of beneficial ownership Question remains: how far does it extend? Initial HMRC reaction � Draft Guidance Group finance subs (multiple loans in and out) CDOs � waterfall arrangements

17. 3) The Bank of Scotland case French Conseil d�Etat, 29th December 2006 UK-France Double Taxation Convention of 1968

18. 3) The Bank of Scotland case

19. 3) The Bank of Scotland case Legal background 25% non-treaty withholding tax � reduced to 15% by Art. 9(6) of the UK-France DTC (with a bo limitation) Right to repayment of dividend tax credit � under Art. 9(7) � (no bo limitation) No right to repayment of the dividend tax credit under the France-US double taxation convention

20. 3) The Bank of Scotland case The Conseil d�Etat decided: The transaction was not a usufruct: there was an abuse of legal form; it was in reality a loan to the US parent from the Bank, repaid by the French subsidiary The beneficial ownership limitation applied also to the repayment of the dividend tax credit � it was a general requirement in tax treaties

21. 3) The Bank of Scotland case Note: the Bank was not nominee or mere fiduciary However, the Conseil d�Etat confirmed that the beneficial ownership limitation reflected a general, abuse of law doctrine to deny treaty shopping The repayment of the excess withholding tax and dividend tax credit was denied

22. 4) Indofood and Bank of Scotland compared Both cases suggest a wider use of the �beneficial ownership� limitation to counter treaty shopping � not a narrow anti-avoidance measure The exact meaning of �beneficial ownership� left unclear by the English Court of Appeal, especially the role of the OECD Commentary

23. 4) Indofood and Bank of Scotland compared The Conseil d�Etat suggest a very wide use of the beneficial ownership limitation Note: the Bank was clearly not a nominee or agent or mere fiduciary / conduit (except in a broad factual sense)

24. 5) Consequences of the Indofood and Bank of Scotland cases HMRC draft Guidance on finance structures � more challenges to claims for reduced / zero withholding taxes likely France � possibly more challenges on treaty shopping (a change from the traditional approach in France) Background of protecting source country taxation

25. 5) Consequences of the Indofood and Bank of Scotland cases Possibility that other countries will follow E.g. Indonesian Supreme Court case � 17th October 2006 Changes to OECD Commentary? Do we need more clarification of the meaning of the beneficial ownership limitation Are detailed anti-abuse measures needed in DTCs?

26. Double Taxation Conventions andBeneficial Ownership Clauses Congresso Internacional de Direito Tributario � Rio de Janeiro Philip Baker QC Grays Inn Tax Chambers